Fundamentally, a top-up loan is a facility provided by banks and financial institutions to customers who regularly pay their home loan EMI’s (Equated Monthly Instalments) and require additional funds to meet their expenses. However, the top-up loan rules clearly state that it can only be availed for the particular property for which you have availed the home loan. While sudden expenses may be overwhelming, top-up loans ensure an additional sum over and above the existing loan.
What is a top-up loan?
A top-up loan is an additional loan amount raised over the current home loan. Banks and financial institutions offer this facility to their existing home loan customers. However, the tenure of the home loan varies, and it can go up to 15-20 years depending upon the tenure of the home loan availed. The top-up loans offer a brilliant opportunity to overcome all the financial bottlenecks irrespective of the purpose for which it is required. Interestingly, a home loan top-up is easy to avail since the lender has already checked your home loan eligibility and would not require much documentation for the new loan.
According to Virendra Kumar, Home Loan Expert, Gurgaon, “The amount of top-up loan that can be availed by a customer varies from one financial institution to another. Ideally, a top-up loan amount and the outstanding home loan amount together should be equal to only 80 per cent of the total value of the property.”
For instance, Mr X avails a home loan on a property valued at Rs 20 lakh. After repaying an amount of Rs 8 lakh, he wants to raise a top-up loan for personal use. Here, the amount of additional loan that can be issued to Mr X is only Rs 4 lakh (12+4=16) which is 80 per cent of the total property value.
What is the eligibility criteria for a top-up loan?
The eligibility criteria for top-up loan is same as home loan, i.e.-
- Not more than one EMI bounce should reflect in your bank statement of the previous year
- In case of an EMI bounce, it must have been cleared before the next due date
- Clear repayment of home loan EMIs for six months is essential
General criteria
- Applicant’s age must be between 21 years and 65 years
- Nationality- Indian or Non-Resident Indian
- Profession- Salaried or self-employed
How to apply for a top-up loan?
The process for applying for a top-up loan varies from bank to bank. Some financial institutions provide the facility to customers who have completed six months of loan repayment. However, some may extend this period to 12 months. In both cases, a customer should be a regular payer.
An individual applying for the top-up loan should fill out an application form requesting a top-up loan. Salary slips and the latest bank statements should be attached with the application form. The loan amount is usually disbursed in 48-60 hours.
Could the article help you understand the topic?
Pros and cons of a top-up loan
Pros
No limitation on spending
The amount raised from a top-up loan can be used for any purpose related to your existing property. It can be used for buying a parking space, renovation of the house, furniture purchase, or other personal outlays.
Speedy process
As it is offered to only existing home-loan customers, one can avail of it within 2-3 days. Besides, the verification process is also simple and quick.
Low-interest rate
A top-up loan is a lucrative way to raise funds as they have low-interest rates compared to personal loans. The interest rate varies from bank to bank and may range between 11 per cent and 13 per cent. However, a personal loan may go up to 22 percent.
No mortgage required
An existing home loan customer can avail themselves of the top-up loan without offering any additional security to the lending institution.
Cons
Only applicable to existing customers
The biggest disadvantage of top-up loans is that only existing home loan customers can apply for them. In addition, customers with poor track records cannot avail this facility.
No tax advantages
No tax advantage is available on top-up loan amounts raised for personal purposes. The tax benefit is restricted to only exclusive purposes pertaining to the renovation of the home or construction activity.
No impact on capital appreciation
The buyer can only avail of the top-up loan as per the outstanding amount of the home loan through repayment. Even if the property witnesses a price appreciation, the quantum of the top-up loan cannot be increased.
How to calculate top-up loan?
Financial institutions calculate the top-up loan after gauging the outstanding home loan liability. They estimate the Fixed Obligation to Income Ratio (FOIR) for the top-up loan, after deducting the existing obligations. Also, the interest rate on top-up loans varies across banks. Hence, before you apply for it, check across numerous banks to get the lowest rate.
A top-up loan is an easy and prompt way to raise funds and meet your contingent requirements. It is possible to negotiate for a better interest rate on a personal top-up loan based on a strong repayment track record and a good credit score. If you have been servicing the personal loan for some time, ensure that all the dues are paid on time. However, it is imperative to delve into the above pros and cons and analyse the deal end-to-end before making a final decision.
